Jagadeesh Gokhale (Author at Cato Institute)Individual Liberty, Free Markets, and Peacehttp://www.cato.org/
enamast@cato.org (Andrew Mast)webmaster@cato.org (Cato Webmaster)Thu, 20 Nov 2014 16:35:58 -0500Fri, 21 Nov 2014 13:41:07 -0500The Specter of "Secular Stagnation" and Appropriate Policy Responseshttp://www.cato.org/publications/cato-online-forum/specter-secular-stagnation-appropriate-policy-responses
<p>The current debate over “secular economic stagnation” seems rife with inappropriate metrics and verbiage. Prominent analysts are using claims about “GDP gaps” and “investment shortfalls” to promote massive increases in government expenditures. However, when recommendations to reverse a long-term growth slowdown sound identical to those for re-employing idle resources during recessions, something seems amiss. A better approach would prioritize reforms of the federal tax system and resolutions of large extant financial imbalances in social insurance programs.</p>
<p><strong>The “GDP Gap” Claim</strong></p>
<p>Concern over a forthcoming secular stagnation is prompted by the slow recovery from the 2007-09 recession and a large apparent “GDP gap” in its aftermath: Comparisons of actual GDP with GDP projected using pre-recession growth rates show that the “GDP gap,” thus measured, has become especially large after the last recession (Figure 1).</p>
<p><img src="http://www.cato.org/sites/cato.org/files/images/chart-gokhale-economicrecovery.jpg" alt="image" / ></p>
<p>But that recession involved a financial sector collapse from an almost universally unexpected and broad decline in home prices. The ensuing mortgage defaults and foreclosures triggered financial deleveraging and portfolio imbalances for households, firms, and banks, prompting stricter lending standards. Previous credit relationships, built over a long time, have been obliterated.<sup>1</sup> As validated by the historical record, a slow recovery was inevitable. Five years after the recession ended, however, the recovery has progressed sufficiently to cast doubt that resource underutilization remains significant.<sup>2</sup></p>
<p>Judgment about future potential GDP and growth should be based primarily on <em>prospective</em> growth of productive factors and not pre-recession growth rates upon which GDP-gap metrics are based. Under today’s social and demographic features and continued anti-work and anti-investment policies, the conjecture that future <em>sustainable</em> economic growth will be lower seems credible. If that is correct, promoting faster economic growth through policies to boost aggregate demand is unlikely to work.</p>
<p><strong>The “Investment Shortfall” Claim</strong></p>
<p>A popular explanation of the slow recovery is in terms of the natural interest rate. High global saving — which initiated the pre-recession housing boom — is continuing but aggregate (especially investment) demand has slowed causing the natural interest rate to become negative – a condition where normal monetary policy tools are inoperative. Such a superficial macroeconomic analysis directly motivates proposals for additional debt-financed public expenditures to offset the “investment shortfall.”</p>
<p>A more appealing alternative to the “investment shortfall” view is insufficiency of “investment capacity.” Low investment demand results not necessarily from mistaken private sector decisions in a negative interest rate environment but from poor prospective economic conditions and economic policies that exacerbate those conditions. Low growth in the supply of complementary productive factors is making additional private capital investments in the United States not worthwhile.</p>
<p>High cash holdings by firms and households and more frequent business inversions are signals of investment incapacity in the United States — the lack of complementary productive factors, especially human capital, and prospects of tax rate increases.<sup>3</sup> This calls for focusing on tax policy reforms to accelerate the growth of productive factors and improve, in that way, the environment for investments in both human and physical capital.</p>
<p><strong>Questionable Remedies</strong></p>
<p>Prominent analysts are using questionable “GDP gap” and “investment shortfall” rationales to motivate large additional government expenditures for infrastructure, construction, energy, and other sectors to boost economic growth.<sup>4</sup> They also recommend reintroduction of accelerated depreciation programs, investment tax credits, and credit enhancement programs to stimulate private investment.<sup>5</sup></p>
<p>While additional public investments may be justified under particular local economic conditions, a debt-financed surge in such spending to achieve uncertain and unverifiable “national macroeconomic goals” is best avoided when structural features of the population and economy appear inconsistent with sustainable output growth as rapid as that witnessed the past.<sup>6</sup> Under such conditions, attempts to massively stimulate the economy beyond its sustainable growth risk higher inflation or asset price bubbles — notoriously detectable only after they burst with disastrous economic effects. Moreover, investment incentive policies being recommended would circumvent financial market lending criteria, increase government-funding costs, and saddle taxpayers with additional credit risks.<sup>7</sup></p>
<p>The alternative, “investment incapacity” view suggests removing structural, policy-induced impediments to the growth of productive factors. Thus, federal fiscal policies, especially tax reforms, are more appropriate. Those worthy of urgent consideration are (1) federal tax system reforms to increase simplicity, fairness, and efficiency and (2) early and definitive resolutions of large extant financial imbalances of social insurance programs to reduce future policy uncertainty.</p>
<p><strong>Determinants of Future Sustainable Economic Growth</strong></p>
<p>Future growth in U.S. productive factors is influenced by:</p>
<ul>
<li>Labor force growth and attachments</li>
<li>Workers’ educational attainments</li>
<li>Expectations of future taxes and profitability under growing federal unfunded obligations</li>
<li>Rates of family formation and types of family structures</li>
<li>Entrenched social insurance policies that deepen anti-market incentives and policy uncertainty</li>
</ul>
<p>Features of the U.S. demographic and economic profile suggest continued increases in some these components — but at a slower pace than earlier — and declines in others. Some prospective growth features of productive factors are “baked in” the U.S. demographic profile and are not materially alterable through popularly acceptable policy changes. Experienced baby-boomers will be replaced by a smaller cohort of similarly aged but not necessarily similarly experienced workers. Census Bureau data show labor-force attachment of working-aged individuals trending downward with more workers employed part time rather than full time since the year 2000.<sup>8</sup> Today’s demographic momentum appears likely to carry those trends forward.<sup>8</sup> The Affordable Care Act will likely reduce labor force attachment through higher wage taxes, reduced employer-based health insurance, larger health care subsidies, and expanded Medicaid eligibility.<sup>10</sup></p>
<p>The workforce’s schooling-completion rates have been increasing with payoffs to education. However, those rates differ dramatically by gender, race, and other socio-economic characteristics. Growing population diversity, the rising cost of acquiring education, and growing economic inequality appear likely to slow future education and skill advancement rates.</p>
<p>Family formation, which has declined for several decades, fell dramatically during the recession.<sup>11</sup> Marital status, stability, family size, and living arrangements are correlated with labor productivity and the trends in those attributes suggest lower future productivity. For example, residence by young adults with their parents, which is associated with poorer work prospects and later job attachment, has increased.</p>
<p>On balance, projections suggest that these factors will impart a net drag on future labor productivity and output growth.<sup>12</sup> Hence, policies to promote a secular expansion of the economy’s productive factors should be prioritized over broad and potentially haphazard expansions of public investment expenditures.</p>
<p>These productivity-reducing demographic and economic trends could be countered through a fairer, flatter, and more efficient tax system. Broadening the tax base by eliminating loopholes and reducing tax preferences — such as health care, mortgage interest, state and property taxes, and various household and business tax credits — would permit tax rate reductions to generate stronger incentives for education, work, saving, and entrepreneurship. Moreover, reducing the 35 percent corporate tax rate — among the highest in the world — would increase the international competitiveness of American businesses.</p>
<p><strong>Public Sector Debt and Unfunded Obligations</strong></p>
<p>Perhaps the most significant threat to American economic dynamism is the federal government’s large and growing unfunded obligations. Calculations indicate that the total U.S. federal “fiscal imbalance,” assuming continuation of today’s fiscal policies, amounts to $83 trillion in today’s dollars or 8.4 percent of the present value of future GDP (PVGDP).<sup>13</sup> Out of this prospective federal financial shortfall, the share arising from the two largest entitlement programs — Social Security and Medicare — is $67 trillion or 6.8 percent of PVGDP. Finally, the share of the fiscal imbalance contributed by past and living generations under those two social insurance programs amounts to $54 trillion or 5.5 percent of PVGDP.<sup>14</sup> These figures show, not the projected amount of a future debt build-up, but the structural financial imbalance embedded in current fiscal policies, which must be resolved by changing those policies.</p>
<p>The fiscal imbalance as a share of the present value of future payrolls amounts to nearly 19 percent. It implies that payroll taxes would have to be more than doubled — or federal expenditures reduced equivalently — to eliminate that imbalance. The large current-policy imbalance implies high uncertainty about future fiscal policy, which likely erodes incentives to acquire education and skills, work, save, invest, and start businesses. Those incentives will likely worsen while reforms to establish credible and dependable tax and expenditure policies are postponed. Social insurance reforms to recognize program debt to retirees, slow benefit increases, index retirement ages to human longevity, and introduce pre-funded saving programs to bolster retirement security, would prevent the federal budget imbalance from escalating.</p>
<p><strong>Conclusion</strong></p>
<p>Today’s federal fiscal overextension arose primarily from past expansions of pay-as-you-go-financed entitlements for retirees and others who spend at a faster rate out of their resources. This was the channel for past aggregate-demand boosts accomplished through the public purse. Having exhausted the scope for similar increases in entitlement benefits — because social insurance programs are approaching insolvency — some analysts are seeking to boost public expenditures by conjuring the specter of “secular stagnation” under questionable metrics, superficial analyses, and misleading rhetoric about “investment shortfalls.”</p>
<p>As argued herein, prospective slower growth in productive factors merits prioritizing the removal of constraints on “sustainable growth,” which requires prioritizing fiscal policy reforms. Key among such reforms are (1) a comprehensive tax reform to broaden the tax base, eliminate tax loopholes and preferences, and make U.S. taxes more internationally competitive and (2) a resolution of the financial imbalance in social insurance and other federal programs to restore dependability to future U.S. fiscal policy.</p>
<p><strong>Notes</strong><br />
<sup>1</sup> <a href="https://dl.dropboxusercontent.com/u/17453613/graphs-US.pdf" target="_blank">US Economic Snapshot</a> by Zach Bethune et al. Residential fixed investment, business sector borrowing and assets, household sector borrowing and net worth, home values, and lending volumes still remain significantly below their pre-recession levels.<br />
<sup>2</sup> Estimates of industrial capacity utilization are available at <a href="http://www.federalreserve.gov/Releases/g17/current/default.htm" target="_blank">Federal Reserve Statistical Release</a>. The U.S. Bureau of Labor Statistics September, 2014, unemployment-rate estimate of 5.9 is lower than its average since 1960 (over non-recession quarters) of 6.0 percent.<br />
<sup>3</sup> New businesses (less than one year old) have exhibited a declining trend since the great recession and employment generation by new businesses has declined consistently since 1999. See <a href="http://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm" target="_blank">data</a> provided by the Bureau of Labor Statistics.<br />
<sup>4</sup> “<a href="http://www.bostonglobe.com/opinion/editorials/2014/04/11/idle-workers-low-interest-rates-time-rebuild-infrastructure/UIYHNLdzN0frz0VMVkTS1K/story.html" target="_blank">Idle workers + Low interest rates = Time to rebuild infrastructure: If now is not the moment to rebuild, when is?</a>” by Lawrence H. Summers, <em>The Boston Globe</em>, April 11, 2014; Prof. Summers’ address to the IMF.<br />
<sup>5</sup> <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCAQFjAA&url=http%3A//academiccommons.columbia.edu/download/fedora_content/download/ac%3A158009/CONTENT/10279.pdf&ei=3WEtVKnnKKjfsAS9sYK4Cw&usg=AFQjCNEYxVADp9zQbUAYLnPzx1dBxS8mIA&sig2=0O2Z6FIiaBE8OPryv_0rsA&bvm=bv.76477589,d.cWc" target="_blank">Should the Government Invest or Try to Spur Private Investment?</a> by Michael Cragg and Joseph A. Stiglitz, Berkeley Electronic Press, April 2011.<br />
<sup>6</sup> <a href="http://www.nber.org/papers/w17444" target="_blank">Clearing up the Fiscal Multiplier Morass</a>, by Eric M. Leeper, Nora Traum and Todd B. Walker, National Bureau of Economic Research Working Paper No. 17444.<br />
<sup>7</sup> Such incentives also reduce capital asset values and borrower collateral, which could offset the direct positive effect on investment.<br />
<sup>8</sup> “<a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCAQFjAA&url=http%3A%2F%2Fwww.bls.gov%2Fopub%2Fmlr%2F2012%2F01%2Fart3full.pdf&ei=4GItVObXA4K1sQT0qYHQDg&usg=AFQjCNGCixHeu5F-yAzi5vR__j4vqfKv1A&sig2=gURXO3auyVvwMbqujMiOyQ&bvm=bv.76477589,d.cWc" target="_blank">Labor Force Projections to 2020: A More Slowly Growing Workforce</a>” by Mitra Toosie, <em>Monthly Labor Review</em>, January, 2012, and “<a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCAQFjAA&url=http%3A//www.bls.gov/opub/mlr/2012/10/art1full.pdf&ei=GGMtVKzLFenGsQTnloH4CQ&usg=AFQjCNHns6FGBCL46E6WHu2TAaevI1-G5w&sig2=xEDBhukjg5RDTQudVwYncA&bvm=bv.76477589,d.cWc" target="_blank">Projections of the Labor Force to 2050: A Visual Essay</a>,” by the same author, <em>Monthly Labor Review</em>, October, 2012.<br />
<sup>9</sup> Demographic momentum refers to trends in population diversity. See “<a href="http://www.bls.gov/news.release/pdf/nlsoy.pdf" target="_blank">Number of Jobs Held, Labor Market Activity, and Earnings Growth Among the Youngest Baby Boomers: Results from a Longitudinal Survey</a>,” Bureau of Labor Statistics, News Release, Table 3, July 25, 2012.<br />
<sup>10</sup> <a href="http://caseybmulligan.com/MulliganMTRACA.pdf" target="_blank">Average Marginal Labor Income Tax Rates Under the Affordable Care Act</a>, by Casey Mulligan, November 2013, University of Chicago.<br />
<sup>11</sup> Couples are delaying marriage or foregoing matrimony altogether following the last economic recession: Figure 9 in “<a href="http://www.prb.org/pdf11/us-economic-social-trends-update-2011.pdf" target="_blank">A Post-Recession Update on U.S. Social and Economic Trends</a>,” by Linda A. Jacobsen and Mark Mather, <em>Population Bulletin Update</em>, 2011.<br />
<sup>12</sup> See U.S. demographic and economic projections in <em><a href="http://www.amazon.com/Social-Security-Fresh-Policy-Alternatives/dp/0226300331" target="_blank">Social Security: A Fresh Look at Policy Alternatives by Jagadeesh Gokhale</a></em>, University of Chicago Press, 2010.<br />
<sup>13</sup> Author’s updated calculations based on the Congressional Budget Offices’ fiscal year 2013 budget projections. For the methodology see <a href="http://object.cato.org/sites/cato.org/files/pubs/pdf/spending-beyond-our-means.pdf" target="_blank">Spending beyond Our Means: How we are Bankrupting Future Generations</a>, by Jagadeesh Gokhale, Cato Institute White Paper, 2013.<br />
<sup>14</sup> Accrued-basis social insurance unfunded obligations amount to $41 trillion.</p>
<hr />
<p><em>The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on <a href="http://www.cato.org/conference-forum/reviving-economic-growth">reviving economic growth</a>.</em></p>
http://www.cato.org/publications/cato-online-forum/specter-secular-stagnation-appropriate-policy-responsesThu, 20 Nov 2014 15:26 ESTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleJagadeesh Gokhale discusses proposed SSDI reforms on WYFL's The Phil Valentine Showhttp://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-proposed-ssdi-reforms-wyfls-phil
http://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-proposed-ssdi-reforms-wyfls-philWed, 29 Oct 2014 12:52 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleSSDI Reform: Promoting Gainful Employment while Preserving Economic Securityhttp://www.cato.org/publications/policy-analysis/ssdi-reform-promoting-gainful-employment-while-preserving-economic
<p>The Social Security Disability Insurance (SSDI) program faces imminent insolvency. Annual expenditures totaled $143 billion in 2013, but program receipts amounted to $111 billion—a shortfall that is projected to continue indefinitely. According to the Social Security Trustees, the program’s trust fund will be fully depleted in 2016, compelling either a large benefit cut or a large tax hike—neither option being politically popular. Regardless of the program’s insolvency, SSDI creates substantial work disincentives, causing many with medical impairments who could work to withdraw from the labor force and apply for SSDI. That undesirable outcome arises from the complicated rules and procedures that SSDI uses to establish benefit eligibility. But rectifying SSDI’s processes is a monumental task, unlikely to be accomplished in the short term.</p>
<p>Determining whether medical impairments imply inability to work is becoming more difficult in a growing number of cases, with the result that many applicants with residual capacities are admitted to SSDI. Many beneficiaries express a desire to return to work but fear of losing benefits and health coverage under SSDI’s current benefit rules impedes such a decision. Accordingly, this paper advocates a change in the structure of SSDI’s benefit payments to those admitted to the program. Shifting benefits at the margin toward paying beneficiaries to work rather than to remain out of the work force would encourage beneficiaries with residual work capacities to return to work. That shift would serve as a backstop to reduce the economic loss from wrongful allowances of applicants into SSDI. Such a switch in benefit design can be accomplished without compromising benefit eligibility for those who cannot work. The paper explains how to implement such a change to SSDI’s benefit structure and the advantages that would accrue from it. Apart from creating better incentives to work, the proposed reform complements other reforms Congress might adopt.</p>
http://www.cato.org/publications/policy-analysis/ssdi-reform-promoting-gainful-employment-while-preserving-economicWed, 22 Oct 2014 (All day)Jagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleSSDI Reform: A New Benefit Structure to Encourage Work by Individuals with Disabilitieshttp://www.cato.org/publications/commentary/ssdi-reform-new-benefit-structure-encourage-work-individuals-disabilities
<p>With annual benefit payments projected to consistently exceed revenues, the Social Security Disability Insurance (SSDI) program will become insolvent in 2016. Apart from its financial problems, however, the program is structurally unsound: Its rules induce those who could work despite medical impairments to exit the labor force and apply for benefits. SSDI’s application and approval procedures are lengthy, costly, and inefficient, often allowing those with residual work capabilities into the program. SSDI’s rules trap claimants into permanently remaining idle or underemployed for fear of losing benefits and low-cost Medicare coverage. In view of the considerable and growing uncertainties involved in determining whether medical impairments imply inability to work, it would be advantageous to change SSDI’s benefit structure: We should pay beneficiaries to work, if they can, rather than remain idle.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">The program is structurally unsound: its rules induce those who could work despite medical impairments to exit the labor force and apply for benefits.”</span></p>
</blockquote>
<p>Disability is rarely all-or-nothing with individuals either capable of working or not but the law requires SSDI officials to make discrete “yes or no” decisions on allowances. Hence, some analysts are proposing a “partial-benefits-for-partial-disability” system that would permit beneficiaries to work <em>and</em> receive benefits. But such a system will also require a bureaucratic determination of each applicant’s degree of work-disability — something inherently difficult for many types of medical impairments such as mental health, back pain, and so on. If benefit levels for disability grades are set too low or if adjudication errors abound, deserving applicants would be harmed. If benefits are too generous, yet more individuals with slight medical impairments may choose to apply. In view of SSDI’s current struggles with “policy compliance,” it’s difficult to believe that system performance would improve under a partial benefits system.</p>
<p>Under current SSDI rules, benefit eligibility depends on proving that an applicant’s medical impairment prevents earning at the Substantial Gainful Activity (SGA) level of $1,070 per month for at least one year. It means applicants must exit the work force or, at least, reduce earnings to less than SGA. And continuation of benefits depends upon claimants’ medical conditions remaining consistent with inability to work at or above SGA, again compelling claimants to remain idle or underemployed. Thus, work disincentives are integral to SSDI as currently constituted. Although studies have shown that up to 40 percent of SSDI claimants are work oriented — wishing, intending, and hoping to return to work to improve their living standards — conventional wisdom holds that there is no way to achieve two goals simultaneously: Provide support to the disabled <em>and</em> maintain robust work incentives for claimants who are willing and able to work.</p>
<p>Fortunately, that conventional wisdom is wrong. There <em>is</em> a way of incentivizing work among SSDI claimants if SSDI’s benefits are structured differently: Switched from paying claimants to remain idle to paying them to work. This could be accomplished simply by replacing the current trust fund (TF) benefit by a work-incentive benefit (WIB). The extent of the substitution of WIB for TF should be based on beneficiaries’ observed earnings and calibrated so that more earnings yield a stronger boost to their total income.</p>
<p>The prospect of increasing incomes by more than earnings through work would induce SSDI claimants to re-enter the work force — but only if they can be assured of financial security: Those who cannot work must receive the full TF benefit and those who choose to work must be guaranteed full restoration of the TF benefit (reversing the switch to WIB) upon job separations from worsening medical conditions or deteriorating labor markets. Such a benefit substitution is likely to involve a very small budget cost — because WIB would be almost fully offset by reductions in TF and is not an additional benefit. And the cost would be positive <em>only if</em> beneficiaries work and contribute more to the economy.</p>
<p>The key advantage of introducing such a benefit structure is to divorce support for the disabled from their incentive to work and earn, if they can, despite their medical impairments. It would help many SSDI claimants to improve their living standards and gain from the social and psychological advantages of work engagement, self-determination, and economic independence. It would also be easy to administer and would require less policing for unlawful work activity by claimants. The larger earnings of SSDI claimants would increase payroll tax revenues and also increase their future Social Security retirement benefits. GBO is unlikely to induce significant additional entry into SSDI by those with medical impairments who continue to work today because the benefit design would confer an advantage to delaying the decision to apply to SSDI. Moreover, this system is likely to reduce “hidden unemployment” and increase the nation’s productivity and output.</p>
http://www.cato.org/publications/commentary/ssdi-reform-new-benefit-structure-encourage-work-individuals-disabilitiesMon, 08 Sep 2014 09:04 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleSSDI: Time for Reformhttp://www.cato.org/publications/commentary/ssdi-time-reform
<p>The just-released Social Security Trustees’ annual report projects that Social Security’s Disability Insurance (SSDI) component will become insolvent sometime during 2016 — leaving not much time for reform deliberations. Recent instances of SSDI fraud have concentrated the minds of lawmakers in Congress. Beyond combating SSDI fraud, however, Congress can use this opportunity to adopt sensible SSDI reforms to improve the lives of individuals with disabilities.</p>
<p>Evidence of behind-the-scene activity on Capitol Hill on SSDI reforms is beginning to emerge. Based on recent Congressional hearings, lawmakers appear highly dissatisfied with how the SSDI program is working. Many are focused on combating SSDI fraud but appear reluctant to adopt more comprehensive reforms.</p>
<p>A few facts on SSDI:</p>
<p>Beneficiaries currently number 11 million and the system admits about 1 million new beneficiaries into the program each year. Current annual SSDI expenditures run at $140 billion. Most significantly, enrollments have consistently exceeded the agency’s projections during the last several years, suggesting strong incentives among those with medical impairments to quit work and apply for SSDI benefits.</p>
<p>SSDI applicants must provide evidence of a medical impairment that prevents work above the Substantial Gainful Activity (SGA) level of earnings — currently $1,070 per month — one that is expected to last for at least 12 months or result in death. This condition means a decision to apply for SSDI compels exit from the work-force. </p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Evidence from the last several recession episodes shows that such enrollment surges were not reversed during the last three recessions once the economy recovered and unemployment abated.”</span></p>
</blockquote>
<p>The existence of a qualifying medical impairment is judged according to “medical listings” — severity of medical conditions that applicants must “meet or equal.” Failing that, applicants may still be admitted to the program for demographic and vocational reasons such as age, education, job skills, job availability in the applicant’s occupation or other occupations, and so on. These criteria induce SSDI applications and allowances to accelerate during recessions.</p>
<p>Evidence from the last several recession episodes shows that such enrollment surges were not reversed during the last three recessions once the economy recovered and unemployment abated. This despite no increase in the population’s share of those with medical impairments, improved technology in assistive devices, and an improved legal environment for accommodating those with medical impairments in the workplace.</p>
<p>Once allowed onto the program, many beneficiaries are reluctant to return to work for fear of losing SSDI’s cash benefits and eligibility to low-cost Medicare coverage — trapping those with residual work capacities and those who could adapt to their impairments and resume work into a state of government dependency.</p>
<p>The majority of applications are professionally represented and representatives appear to be increasingly adept at exploiting SSDI’s procedural nuances to increase allowance success rates. State and local governments have also increased efforts to enroll into SSDI those dependent on state welfare programs to reduce or offset state budget expenditures.</p>
<p>Many observers claim that Social Security agency officials — case examiners, administrative law judges (ALJ), legal assistants, decision writers, appellate personnel, and others are highly diligent at performing their jobs. Nevertheless, statistical analysis of decision patterns suggests a systematic bias toward allowing undeserving applicants onto the program.</p>
<p>Moreover, recent widely reported incidents of fraud by applicant representatives, ALJs, and medical practitioners have heightened suspicions that those were not isolated incidents. Fraud in combination with shortcomings in SSDI’s disability determination procedures may explain a large portion of the secular surge in SSDI enrollments. According to Sen. Tom Coburn’s (R-Okla.) investigations into SSDI allowance patterns: “What we found is 25% of the cases should never have been approved for benefits based on Social Security’s own rules and procedures. So, we had 25% where their own administrating law agents didn’t follow their own rules.”</p>
<p>Congress seems unlikely to repair SSDI’s financial shortfall by adopting politically unpopular measures: Benefit cuts and payroll tax increases. But strengthening measures to combat SSDI fraud may receive bipartisan support. For example, the House Ways and Means Subcommittee on Social Security Chairman Sam Johnson (R-Texas), recently introduced H.R. 5260, the Stop Disability Fraud Act of 2014. This bill would expand SSDI anti-fraud investigation units, increase penalties for committing SSDI fraud, strengthen licensing requirements for medical practitioners and applicant representatives, and require expanded and more frequent information collection and reporting by the Social Security Administration to facilitate closer oversight by lawmakers.</p>
<p>As positive as these steps are, Congress needs to go further. Evidence accumulated since the early 1980s indicates increasing uncertainty and difficulty in making disability determinations — because of improving population health, better technology, greater legal recourse when competing for jobs, better access to public amenities, and improved social attitudes favoring independence, self-determination, and community participation by individuals with disabilities. </p>
<p>Failure by Congress to adopt workable programmatic reforms to SSDI to more strongly encourage return to work by beneficiaries and to assist workers to remain employed despite health obstacles would be a tragic missed opportunity.</p>
http://www.cato.org/publications/commentary/ssdi-time-reformMon, 11 Aug 2014 17:04 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleKicking Social Security's Empty Can Down the Roadhttp://www.cato.org/publications/commentary/kicking-social-securitys-empty-can-down-road
<p>The Social Security Trustees’ report was released in late July, and it shows the program’s finances to have worsened compared to last year — an unsurprising outcome since Congress has not enacted any changes to improve the program’s solvency.</p>
<p>A consistent and sizable worsening in Social Security’s finances during the last decade means that we now face a bigger economic challenge in sustaining a modicum of economic security for today’s and future generations of retirees, survivors, dependents and individuals with disabilities.</p>
<p>The Trustees’ latest report shows that the entire Old Age, Survivors’ and Disability Insurance (OASDI) program accrued an additional $1.8 trillion of unfunded obligations in present value during 2013 when future financial shortfalls are projected without any time limit.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Since the 2004 Trustees’ report was issued, the program’s unfunded obligation has grown larger by a whopping $14.5 trillion.”</span></p>
</blockquote>
<p>Over just the next 75 years — a calculation that understates the system’s present valued funding shortfall — it increased by $1 trillion.</p>
<p>The OASDI trust funds’ claims on future Treasury tax receipts, however, increased by just $32 billion.</p>
<p>This comparison shows in terms of today’s dollars how exceptionally rapidly Social Security’s funding shortfall is growing over time.</p>
<p>Another example: Since the 2004 Trustees’ report was issued, the program’s unfunded obligation (“the can that the cohort of 2004 kicked to us in 2014”) has grown larger by a whopping $14.5 trillion.</p>
<p>The current total shortfall of the OASDI program equals 4.1% of the present value of future taxable payrolls.</p>
<p>It means that to achieve fully funded status, the payroll tax rate would have to be increased by 33% — from its current 12.4% rate to 16.5% immediately and permanently.</p>
<p>Alternatively, benefits must be reduced across-the-board by a commensurate 25%, also immediately and permanently. According to the 2004 Trustees’ report, the then-required immediate and permanent changes would have been a payroll tax increase of 28% or a benefit cut of 22%, respectively.</p>
<p>The comparison of the situation today with that of 2004 shows two things:</p>
<p>First, however these funding changes are introduced — whether in a piecemeal manner or all at once, via tax and benefit changes exclusively or the two in combination — there’s simply no escaping them.</p>
<p>And, second, the only available trade-off is to make smaller changes now — to impose smaller economic costs on many more generations of Social Security participants — or to make larger changes later on a fewer number of younger and future-born generations.</p>
<p>This year’s report also shows the financial implications of current laws for just the Disability Insurance trust fund: It would be exhausted by the year 2016.</p>
<p>After that point, absent change to the program, only 81% of full DI benefits could be paid to individuals with disabilities.</p>
<p>The report also shows that OASDI is headed for insolvency by 2033, after which only 77% of full OASDI benefits could be paid absent program reforms.</p>
<p>This calculation involves the commingling of OASI and DI funding streams to extend DI’s solvency beyond 2016.</p>
<p>Such a commingling of OASI and DI funding is the DI “solution” that is preferred by many who wish to prevent any structural changes to Social Security — especially to DI, given its quickly approaching funding cliff.</p>
<p>Without commingling of OASI and DI funding, however, OASI would remain solvent for one additional year — through 2034.</p>
<p>This fact could pit retirees against individuals with disabilities.</p>
<p>One observer commented that such commingling is necessary to prevent DI beneficiaries from being held hostage immediately and be forced to surrender to benefit cuts.</p>
<p>But the cost of their “release” from DI insolvency by commingling the two trust funds is to compel non-disabled retirees (OASI beneficiaries) to acquiesce to facing benefit cuts one year earlier — in 2033 instead of 2034.</p>
<p>The fact is that solving DI’s funding problem by a simple reallocation of OASI revenues would postpone much-needed structural reforms to the DI program.</p>
<p>The DI program is beset with many operational problems — ranging from fraud on the part of claimants and case officials to serious procedural shortcomings in how medical evidence is acquired and interpreted in many hard-to-diagnose conditions such as back pain and mental illness when determining whether applicants are allowed onto the DI program.</p>
<p>For Congress to postpone Social Security reforms and, especially in the short term, to simply allow funding transfer from OASI to DI without any accompanying structural reforms to the DI program would be to, once again, “kick the can down the road.”</p>
http://www.cato.org/publications/commentary/kicking-social-securitys-empty-can-down-roadTue, 05 Aug 2014 11:22 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleJagadeesh Gokhale discusses an annual report from the Social Security Administration on KPCC's AirTalk with Larry Mantlehttp://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-annual-report-social-security
http://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-annual-report-social-securityMon, 04 Aug 2014 13:42 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleWhere's the Annual Social Security Report?http://www.cato.org/blog/wheres-annual-social-security-report
<p>House Speaker John Boehner (R-Ohio) has announced his intention to sue President Obama for “failure to faithfully follow the nation’s laws” by taking extra-legal executive actions in some areas and failing to execute the laws in other areas such as immigration, judicial appointments, health care, foreign affairs, and so on.</p>
<p>One area where he’s failing to execute the law is Social Security. For instance, the President and his leadership have repeatedly failed to publish on time the Annual Report of the Social Security Trustees, the yearly description of the program’s finances and future outlook. The legal deadline for its publication is April 1—see <a href="http://www.ssa.gov/OP_Home/ssact/title02/0201.htm">section 201 (c)(2)</a> of the Social Security Act. We’re now more than<em> three months </em>past that deadline and there’s no indication that it will appear soon.</p>
<p>Social Security’s ex-officio trustees include the secretaries of the Treasury, Labor, and Health and Human Services, and the (currently acting) commissioner of the program. There are also two public trustees, nominated by the President and confirmed by the Senate. (The two public trustees may not be from the same political party.)</p>
<p>It’s well known that Social Security benefits comprise the largest share of income for a majority of retirees—incomes that they could not do without. So the Trustees’ Report is a crucial document. The information it contains is important to millions of stakeholders—retirees, disability beneficiaries and applicants, financial planners, workers nearing retirement, and others.</p>
<p>Policymakers need to know this information so they can make timely decisions intended to ensure that the program remains on a sound financial footing. For example, the 2013 Report (which didn’t appear until the end of May last year) estimated that the Disability Insurance (DI) Trust Fund will be exhausted and the program will be unable to pay full benefits at some point in 2016. Not much time remains for lawmakers to consider and enact sensible reforms to DI—and the clock is ticking.</p>
<!--break--><p>No doubt, there could be valid reasons for publication delays. New information about the program’s financial status may not become available in a timely manner, and the development of new estimates using updated technical methods may take longer than anticipated. However, there are professional cadres of actuaries and economists dedicated to completing this task. They should, more often than not, anticipate such issues, and instances of publication delay should be the exception rather than the rule.</p>
<p>The table below notes the report’s publication dates during the Bill Clinton, George W. Bush, and Obama (to date) presidencies. It shows that the Obama administration has always been consistently and exceptionally late in issuing the report. In only one of the last six instances has Obama’s designees managed to get the report out <em>within one month after the statutory deadline</em>. In contrast, George W. Bush’s administration released five of its eight annual reports on time and always released the report within a month of the deadline; Bill Clinton released three of his eight reports on time and usually managed to issue the report within a month of the deadline. President Obama’s consistently tardy publication record is difficult to attribute to extenuating circumstances.</p>
<table class="table-bordered" border="0" cellSpacing="2" cellPadding="2" align="center">
<tbody>
<tr>
<td style="text-align: center;" colSpan="4">Annual Report of the Social Security Trustees: </td>
</tr>
<tr>
<td style="text-align: center;" colSpan="4">Publication Date History</td>
</tr>
<tr>
<td>Year</td>
<td>Publication: Day and Date</td>
<td>Timely/Late</td>
<td>President</td>
</tr>
<tr>
<td>2014</td>
<td>?</td>
<td>Late</td>
<td>Barack Obama</td>
</tr>
<tr>
<td>2013</td>
<td>Friday, May 31, 2013</td>
<td>Late</td>
<td>Barack Obama</td>
</tr>
<tr>
<td>2012</td>
<td>Monday, April 23, 2012</td>
<td>Late*</td>
<td>Barack Obama</td>
</tr>
<tr>
<td height="20">2011</td>
<td>Friday, May 13, 2011</td>
<td>Late</td>
<td>Barack Obama</td>
</tr>
<tr>
<td>2010</td>
<td>Thursday, August 05, 2010</td>
<td>Late</td>
<td>Barack Obama</td>
</tr>
<tr>
<td>2009</td>
<td>Tuesday, May 12, 2009</td>
<td>Late</td>
<td>Barack Obama</td>
</tr>
<tr>
<td>2008</td>
<td>Tuesday, March 25, 2008</td>
<td>Timely</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2007</td>
<td>Monday, April 23, 2007</td>
<td>Late*</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2006</td>
<td>Monday, May 01, 2006</td>
<td>Late*</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2005</td>
<td>Wednesday, March 23, 2005</td>
<td>Timely</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2004</td>
<td>Tuesday, March 23, 2004</td>
<td>Timely</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2003</td>
<td>Monday, March 17, 2003</td>
<td>Timely</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2002</td>
<td>Tuesday, April 09, 2002</td>
<td>Late*</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2001</td>
<td>Monday, March 19, 2001</td>
<td>Timely</td>
<td>George W. Bush</td>
</tr>
<tr>
<td>2000</td>
<td>Thursday, March 30, 2000</td>
<td>Timely</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1999</td>
<td>Tuesday, March 30, 1999</td>
<td>Timely</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1998</td>
<td>Tuesday, April 28, 1998</td>
<td>Late*</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1997</td>
<td>Thursday, April 24, 1997</td>
<td>Late*</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1996</td>
<td>Wednesday, June 05, 1996</td>
<td>Late</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1995</td>
<td>Monday, April 03, 1995**</td>
<td>Timely</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1994</td>
<td>Monday, April 11, 1994</td>
<td>Late*</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td>1993</td>
<td>Wednesday, April 06, 1993</td>
<td>Late*</td>
<td>Bill Clinton</td>
</tr>
<tr>
<td colSpan="4">* Report published within 1 month after the legal deadline of April 1st. </td>
</tr>
<tr>
<td colSpan="4">**April 1st was a Saturday.</td>
</tr>
</tbody>
</table>
<p>There are other instances of slippage by the Social Security Administration in executing the program’s laws faithfully. For instance, Reps. Darrell Issa (R-Calif.), Jim Jordan (R-Ohio), and James Lankford (R-Okla.), senior members of the House Committee on Oversight and Government Reform, recently issued a stern letter to Social Security’s acting commissioner, Caroline Colvin, charging the agency with consistently failing to “confront the problems of rapidly rising disability rolls” and “abdicating its responsibility to protect the truly disabled and taxpayers from out-of-control ALJs (Administrative Law Judges) who refuse to follow the law.” This letter cites the report by the committee entitled, “<a href="http://freebeacon.com/wp-content/uploads/2014/07/2014-07-01-DEI-Lankford-Jordan-to-Colvin.SSA-ALJs.pdf">Systemic Waste and Abuse at the Social Security Administration: How Rubber-Stamping Disability Judges Cost Hundreds of Billions of Taxpayer Dollars.</a>”</p>
<p>Such failures are symptomatic of a failing presidency. Multiply the likelihood of poor compliance with the law across all government departments—you can be the judge on whether that’s happening—and President Obama’s historic low poll ratings (currently in the low 40s) seem surprisingly <em>high</em>. It brings to mind an important sound-bite from the 2008 presidential campaign: Hillary Clinton’s question about who would be more competent to answer a 3 AM phone call on a policy emergency. The White House phones must be ringing constantly, like church-bells.</p>
http://www.cato.org/blog/wheres-annual-social-security-reportMon, 07 Jul 2014 12:13 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleObama's Odd myRA Proposalhttp://www.cato.org/multimedia/daily-podcast/obamas-odd-myra-proposal
<p>The President’s myRA proposal aimed at helping low-income Americans save for retirement seems to have missed a key element of helping low-income people save more: the tax break provided by traditional IRAs. The myRA proposal doesn’t provide that break and, says Jagadeesh Gokhale, that makes it an inapt savings vehicle for people with low incomes.</p>
http://www.cato.org/multimedia/daily-podcast/obamas-odd-myra-proposalWed, 05 Mar 2014 17:17 ESTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleMichael Tanner and Jagadeesh Gokhale on entitlement spending and the War on Povertyhttp://www.cato.org/multimedia/cato-audio/michael-tanner-jagadeesh-gokhale-entitlement-spending-war-poverty
http://www.cato.org/multimedia/cato-audio/michael-tanner-jagadeesh-gokhale-entitlement-spending-war-povertySat, 01 Feb 2014 15:20 ESTJagadeesh Gokhale (Author at Cato Institute)Michael D. Tanner, Jagadeesh GokhaleEntitlement Reform Must be Part of the Dealhttp://www.cato.org/publications/commentary/entitlement-reform-must-be-part-deal
<p>President Obama’s description of what it means to not increase the debt limit is disingenuous. Here’s what he said at his October 8 press conference: “…raising the debt ceiling is a lousy name… it does not increase our debt. It does not grow our deficit, it does not allow for a single dime of increased spending. All it does is (to) allow the Treasury Department to pay for what Congress has already spent.”</p>
<p>Not only is his rhetoric misleading, it reveals how really deep the debt hole is, and how massively difficult the task of climbing out of it will be.</p>
<p>The gridlock on raising the debt limit is but a symptom of deeper divisions in the nation. Those divisions stem largely from long-standing misdirection by public officials on the size of the nation’s indebtedness, arising primarily from entitlement programs that have massive financial imbalances built into them. Those are not part the $16.7 trillion debt already on the books. But they are precisely the ones that President Obama now wishes to unambiguously include in “our debt.” If we used that reasoning, the debt limit has already been breached.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Each time we increase the debt limit, we allow more of the future entitlement debt– one could also call it implicit debt — to be converted to explicit debt.”</span></p>
</blockquote>
<p>Under the president’s definition, “our debt” must include future unfunded federal payment obligations including Social Security and health care benefits that are expected to grow especially rapidly. But none of the President’s budget agencies—the Congressional Budget Office, the Office of Management and Budget, the General Accountability Office, etc., are willing to measure and transparently report the size of the projected revenue shortfall that the President has now clearly stated is a part of “our debt.”</p>
<p>What we do know is including promised, but unfunded, entitlement payments in “our debt” make it a very large number.</p>
<p>Unfortunately, based on historical precedent, the political deadlock on entitlement reforms is unlikely to be resolved anytime soon. Indeed, there are procedural hurdles involved: In the Senate, for instance, any bills seeking changes to Social Security’s provisions fall under the so-called Byrd rule, which means they can be challenged as inadmissible by a single Senator.</p>
<p>But regardless of how hard it is, it must be done. Because each time we increase the debt limit, we allow more of the future entitlement debt– one could also call it implicit debt — to be converted to explicit debt.</p>
<p>Historically, an increase in the statutory limit on explicit debt has been paired with fiscal reforms. This is par for the course “budget restructuring” that any creditor would insist upon before making a ‘bridge loan” to a failing business. It’s what the IMF, ECB and the European Commission have insisted upon before approving financial aid packages for Greece, Portugal, Spain, and other EU nations—that would otherwise suffer financial ruin and chaos.</p>
<p>Could the Greeks demand financial aid from without undertaking any commitments to change their budget and accounting policies? The answer is no for the Greeks and it should be no for the federal government too.</p>
<p>The president has stated that he would sit down and put everything on the table if Republicans work with him to unconditionally fund the government and increase the debt limit. The Republicans appear ready to take the President at his word and provide a short-term increase in the debt limit. But they should be wary of setting up another commission for deciding on long-term reforms. Recall, when his own Simpson-Bowles commission made debt reduction proposals that garnered 11 supporting votes out of 18 commission members and was lauded by observers from across the political spectrum, Obama froze it out of consideration.</p>
<p>This critique of the President’s words does not imply a pass to Republicans—who in the past have also baulked at reforming entitlement programs. Indeed, past Republican administrations and Congresses worsened the fiscal outlook by driving through multiple tax cuts and expanding Medicare without bearing the political cost of explicitly funding the expansion.</p>
<p>Some economists have already declared the U.S. to be bankrupt: It is seems impossible to fund entitlement promises embedded in today’s fiscal laws and increasingly difficult to contemplate reducing entitlement expenditures to the extent necessary to resolve “our debt.” We need a fail-save mechanism for agreeing, within a limited time frame, to meaningful debt reduction measures. That alone is likely to stimulate economic growth and employment.</p>
<p>Agreement by Republicans to increase the debt limit for anything more than a couple of months would hand Democrats a reason to procrastinate. It would be like inviting debtors to be choosers. That’s unlikely to reveal the proper path out of “our debt” troubles.</p>
http://www.cato.org/publications/commentary/entitlement-reform-must-be-part-dealFri, 11 Oct 2013 15:07 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleAnother Super-Committee Destined for Failure? Sure, Why Not!http://www.cato.org/publications/commentary/another-super-committee-destined-failure-sure-why-not
<p>In April 2011, I wrote <a href="http://www.cato.org/publications/commentary/why-we-must-freeze-debt-limit">the following</a> to describe the state of the debt limit debate:</p>
<p>“With the national debt at $14.27 trillion and rising, Congress must soon approve an increase in the legal debt ceiling — now at $14.29 trillion — so that the Treasury can continue conducting the nation’s fiscal operations.”</p>
<p>Fast forward to October 2013 and all you need to do is replace $14 trillion with $16 trillion and that statement is once again current.</p>
<p>The 2011 clash spawned the infamous congressional super-committee and its attempt at a “grand bargain” solution on federal spending and taxes — under threat of sequester cuts. The super-committee failed and sequester cuts unpalatable to both parties were triggered, but both got the political cover they needed.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Entitlement reforms must remain a priority no matter the outcome of the current fight over funding “non-essential” federal programs.”</span></p>
</blockquote>
<p>The situation is changing rapidly. Ratings agency downgrades of U.S. debt in 2011 may have triggered a rethink among Republicans and, at the same time, prompted Speaker John Boehner to separate the debt-limit issue from the fight over Obamacare and short-term federal funding. He could allow the debt limit to be increased through a separate vote in the House. Senate Democrats would probably go along with this strategy.</p>
<p>But increasing the debt limit is only likely to push forward the day of reckoning by a few months.</p>
<p>Naturally, people are wondering what new tricks Congressional leaders will devise to resolve the stalemate on federal funding but avoid political blame. We could be witnessing the solution already with the government shutdown — the indefinite closure of “non-essential” government operations may be acceptable to Republicans.</p>
<p>The late Cato economist, William Niskanen, frequently declared the “starve the beast” strategy of reducing the government’s size by disallowing tax increases to be woefully ineffective. The only remaining option, then, is to close federal non-essential services directly. After all, under the current stalemate, the most highly politically sensitive federal services such as Social Security, Medicare, Medicaid payments, food stamps, unemployment benefits, Obamacare exchanges, the Judiciary, military, air-traffic controllers, and so on, will remain up and running.</p>
<p>The burden of showing that “non-essential” government operations are “essential” is now on Democratic lawmakers.</p>
<p>That leaves the debt limit issue, which remains a concern even if it is pushed ahead by a few months. Resolving it will require a grand bargain between the two political parties on eliminating long-term federal budget imbalances – especially those built into entitlement programs.</p>
<p>Social Security, Medicaid and Medicare remain the secular drivers of U.S. government debt and it’s clear that periodic increases in the debt limit cannot be the answer. For example, federal debt increased by $2.41 trillion since the previous political clash in April 2011. In contrast, the nation’s GDP has increased by just $1.4 trillion. Austerity-phobes such as Paul Krugman argue that sequester cuts are themselves to blame for the slow GDP growth. But anti-austerity arguments are not applicable to long-term structural budget imbalances. Those must be resolved through a grand bargain on taxes and spending.</p>
<p>Entitlement reforms must remain a priority no matter the outcome of the current fight over funding “non-essential” federal programs. The Congressional Budget Office has clearly warned of the negative consequences of accumulating debt under current entitlement policies. CBO projections show that continuing to fund entitlements under current laws – by increasing taxes as needed – would increase the federal government’s control over the nation’s economic output to unacceptably high levels, and increase investment and work disincentives to unprecedented levels. The answer is to combine expenditure cuts with program reforms to restore work and investment incentives.</p>
<p>So how can lawmakers, especially Republicans who claim to favor fiscal restraint and small government, lock in long-term fiscal reforms? They could try yet another super-committee with a gun to its head in the form of entitlement spending cuts. Of course, entitlement program changes contrived under pressure from federal funding and debt-limit crises will likely not yield good policies. Substantive and carefully designed structural changes are needed to restore entitlement programs to their proper functions, respond to increasing human longevity, remove anti-work incentives, and require shared-sacrifice by well-off seniors. But like the sequester cuts that the previous super-committee’s failure triggered, imperfect adjustments may be better than no changes at all.</p>
<p>It may be the only way elected officials can surmount the political hurdles before a “grand bargain” solution. Convoluted as it sounds, Congress must ultimately convene yet another guaranteed-to-fail super-committee under threat of entitlement spending cuts. We should be prepared to hold our noses yet again.</p>
http://www.cato.org/publications/commentary/another-super-committee-destined-failure-sure-why-notFri, 04 Oct 2013 09:11 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleA SAFE Way Out of State and Local Pension Woes? - Panel 2: Experiences from the States: Successes, Failures, and What Comes Nexthttp://www.cato.org/multimedia/events/safe-way-out-state-local-pension-woes-panel-2-experiences-states-successes
http://www.cato.org/multimedia/events/safe-way-out-state-local-pension-woes-panel-2-experiences-states-successesTue, 01 Oct 2013 12:30 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh Gokhale, Eileen Norcross, Richard DreyfussA SAFE Way Out of State and Local Pension Woes? - Panel 1: State and Local Pensions: The Problem and the Scope for a SAFE Solutionhttp://www.cato.org/multimedia/events/safe-way-out-state-local-pension-woes-panel-1-state-local-pensions-problem-scope
http://www.cato.org/multimedia/events/safe-way-out-state-local-pension-woes-panel-1-state-local-pensions-problem-scopeTue, 01 Oct 2013 10:30 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh Gokhale, Preston Rutledge, Robert ClarkRising Costs of Social Security Disabilityhttp://www.cato.org/multimedia/events/rising-costs-social-security-disability
<p>The two main federal disability programs have experienced rising enrollment and soaring spending in recent years. Indeed, combined outlays on Social Security Disability Insurance and Supplemental Security Income have roughly doubled over the last decade to more than $200 billion annually. The programs distort the economy and are adding to the federal government’s fiscal crisis. Cato senior fellow Jagadeesh Gokhale and budget analyst Tad DeHaven have published recent studies on the programs, and they will discuss the causes of recent spending growth, distortions created by the programs, and prospects for reform.</p>http://www.cato.org/multimedia/events/rising-costs-social-security-disabilityTue, 20 Aug 2013 12:27 EDTJagadeesh Gokhale (Author at Cato Institute)Tad DeHaven, Jagadeesh GokhaleThe US in the Red: How Are We Doing?http://www.cato.org/publications/commentary/us-red-how-are-we-doing-structural-imbalances-threaten-our-economic-freedom
<p>Recent upbeat reports about the labor market, housing, and the general economy appear to have sapped lawmakers’ energies from attempting a grand bargain on tax and entitlement reforms. But ignoring structural imbalances in the federal budget that are causing inexorable growth in the nation’s indebtedness threatens large tax burdens on younger and future generations, seriously compromising their economic freedoms.</p>
<p>Brief redux: The economic surge toward the end of the 1990s signaled an improved budget outlook and provoked massive public spending increases, tax cuts, and the Medicare prescription drug program. But the surge proved short-lived and those policies worsened the nation’s fiscal outlook. Post-2008 recession, the debt outlook continues to worsen significantly.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">The window of opportunity to reform entitlement programs, and federal tax and spending policies generally is still open.”</span></p>
</blockquote>
<p>Media coverage of the national debt is almost exclusively about the overt, or visible, national debt, which the U.S. Public Debt Bureau places at just under $17 trillion. The Congressional Budget Office and the Administration’s Office of Management and Budget also focus heavily on the gross national debt and subcategories such as debt held by the public and debt subject to the statutory borrowing limit.</p>
<p>Focus on such narrow debt measure is driven by the need to periodically increase the federal debt limit and enable the government to honor all debt service contracts and</p>
<p>current spending authorizations. But it restricts our attention to the immediate term and distracts from larger and more important concerns about structural imbalances in federal budget policies. A broader evaluation shows that, nascent economic recovery notwithstanding, current budget policies are part and parcel of a vortex of socioeconomic and political forces that are inexorably driving us toward a giant fiscal disaster.</p>
<p>The past is passé: When making budget policies, the $17 trillion of explicit federal debt—the result of past policies and outcomes—should not receive as much importance as prospective debt accumulation under today’s budget policies. And, unlike standard practice, prospective debt accumulation should be evaluated over horizons that are much longer than 10 years. Lawmakers might not have allowed all of those debt funded giveaways during the early 2000s had they based decisions on broader and longer term budget metrics.</p>
<p><strong>A Samall Fraction</strong></p>
<p>The official federal debt of $17 trillion is only a small fraction of the government’s true indebtedness: It includes only outstanding U.S. Treasury securities on which contractual future payments are due. But the government “owes” future payments to millions of additional individuals—those who will become eligible for Social Security, Medicare, unemployment, disability, food stamps, and other government entitlement and welfare programs. And the government “forgoes” tax collections from millions of others through tax preference programs, for example, for those with children, business expenses, low earnings, participants in qualified retirement saving programs, and home mortgage borrowers.</p>
<p>The words “owes” and “forgoes” are in quotes because such benefits expenditures and tax reductions are noncontractual. But some of them, such as federal Social Security and Medicare obligations, may be even more firmly “entrenched”: Entitlement program beneficiaries who “contributed” payroll taxes while working feel strongly “morally and legally entitled” to retirement, survivor, health, and other benefits and they possess growing political clout to maintain those benefits as “promised.” Indeed, the inviolate nature of Social Security and Medicare obligations may exceed that of federal contractual liabilities because, unlike most Treasury securities, entitlements are universally protected against inflation.</p>
<p>If by general consensus, entitlement benefits are considered sacrosanct, the unfunded component of federal entitlement obligations—those exceeding projected payroll tax revenues—should be included in national debt measures. The $17 trillion official figure only includes the contractual debt of the Treasury to the Social Security and Medicare trust funds—equal to the accumulated value of past payroll tax surpluses. But those trust funds fall woefully short of the total unfunded future payment obligations that Social Security and Medicare are facing.</p>
<p><strong>Just in Time</strong></p>
<p>Indeed, the unfunded components of all government expenditures should be included in indebtedness measures. On this score, it is noteworthy that the U.S. Congress adopts one set of fiscal policies on its books, but follows an alternative set of policies in practice: It amends budget laws just before they become current to protect particular groups’ economic interests. Such just-in-time changes have been enacted many times, to protect Medicare and Medicaid doctors from reimbursement cuts and prevent tax increases on middle income groups through broadening scope of the Alternative Minimum Tax. The continual shift away from current-law budget policies results in a “giveaway” to current generations the costs of which will inevitably be borne by future ones.</p>
<p>Using an average government interest rate to evaluate the federal government’s total projected payment obligations in today’s dollars and subtracting from that total the government’s projected receipts—under continuing periodic policy revisions as noted above—I find that the government’s future spending commitments exceed its prospective receipts by $91 trillion—a figure 5.5 times larger than the $17 trillion official national debt.</p>
<p>This estimate implies a fiscal imbalance of 9 percent of projected GDP or, alternatively, 19.7 percent of projected payrolls. Calculations on a generation-by-generation basis show that under today’s federal budget policies, middle-age workers would receive such large federal transfers by way of entitlement and other benefits that their net lifetime taxes would be almost fully eliminated.</p>
<p><strong>Serious Shortcomings</strong></p>
<p>At $66 trillion, Social Security and Medicare contribute more than 70 percent to total federal indebtedness of $91 trillion. Such a large fiscal imbalance indicates serious structural shortcomings in federal budget policies—benefits and tax subsidies that are simply unaffordable.</p>
<p>With 76 million baby-boomers shifting into retirement, much of future federal spending growth will arise in Social Security and Medicare. The way to provide for such spending increases would be to save and invest in the economy’s productive potential. We have not done so for four decades, all the while fully anticipating that baby boomers will eventually retire and demand payment of their lawful entitlement benefits.</p>
<p>The window of opportunity to reform entitlement programs, and federal tax and spending policies generally is still open. But the longer that we delay in restructuring those policies, the larger will future adjustment costs become. Reform delays will boost income expectations of older workers and retirees, inducing them to consume at a faster rate, and they will increase younger generations’ expectations of tax increases, inducing them to acquire fewer skills and work less. These inducements toward reduced saving, lower productivity, and less work will only steepen fiscal burdens on future working generations.</p>
<p>Total federal indebtedness—beyond just contractual payment obligations—must be eventually resolved through federal spending reductions or tax increases—precisely the policies that lawmakers abhor for their negative economic implications in the immediate future. But if these imbalances remain unresolved, growing indebtedness will eventually induce a calamitous economic outcome, probably with even greater intensity than the recent recession. That is, unfortunately, the vicious vortex of conflicting tradeoffs—one involving unavoidable long-term austerity—that lawmakers must carefully navigate. The earlier that they begin, the easier their task will be and the better and intergenerationally fairer the outcomes that could be achieved.</p>
http://www.cato.org/publications/commentary/us-red-how-are-we-doing-structural-imbalances-threaten-our-economic-freedomMon, 24 Jun 2013 09:08 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleDisability Insurance: The New Welfare?http://www.cato.org/multimedia/events/disability-insurance-new-welfare
<p>The Social Security disability program has seen a significant increase in costs and enrollment in recent years. The Trustees project that the program will be insolvent as early as 2016. This recent growth and the program’s looming insolvency have brought it increased attention and added urgency to calls for solutions. Cato senior fellow Jagadeesh Gokhale, Social Security Administration chief actuary Stephen Goss and leading scholars David Autor from MIT and Harold Pollack from the University of Chicago will provide their insights into the problems with the program’s current structure, causes of recent program growth, and prospects for reform.</p>http://www.cato.org/multimedia/events/disability-insurance-new-welfareWed, 19 Jun 2013 12:00 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh Gokhale, David Autor, Harold Pollack, Stephen C. Goss, Michael D. TannerSocial Security Falls Even Deeper into a Sinkholehttp://www.cato.org/publications/commentary/social-security-falls-even-deeper-sinkhole
<p>The 2013 Social Security Trustees’ report, released last week, is proof positive that you really can make numbers say whatever you want. By highlighting one set of “asset reserves” that showed some growth, the report gives ammunition to those who would rather not deal with the fact that the program is on a path to disaster.</p>
<p>The Trustees’ report begins by noting that: “Asset reserves held in special issue U.S. Treasury securities grew from $2,678 billion at the beginning of the year to $2,732 billion at the end of the year.” Translation: the program is “not in a crisis.”</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Social Security is inexorably headed toward financial insolvency”</span></p>
</blockquote>
<p>But one year of growth in Treasury securities does not a stable program make. Those securities represent assets to the Trust Fund, but not necessarily to the economy and to our ability to pay obligations. Our capacity for income, wealth, and employment generation is not enhanced just because the Trust Funds hold more paper assets. If that were true, simply depositing even more paper IOUs into the Social Security Trust Funds would make us more prosperous.</p>
<p>To really understand the crisis this program faces, the Trustees should be comparing the $55 billion in asset growth to the exploding growth in its unfunded obligations, which increased by $1 trillion during 2012. This also happened in 2011 when increased obligations of $2.1 trillion far outstripped the $69 billion increase in the program’s Treasury security holdings.</p>
<p>The program’s total unfunded obligations over the next 75 years has now grown to $9.6 trillion, more than one-half as large as the outstanding gross federal debt of $17 trillion.</p>
<p>The two major political parties clashed over raising the debt ceiling in 2011 and may do so again later this year. But mum appears to be the word on Social Security’s growing debt. The program’s Trustees appear to encourage such “flying under the radar” on Social Security’s debt by burying the program’s increases in unfunded obligations within a flurry of jargon — actuarial cost and benefit rates and actuarial balance ratios — mindless jibber-jabber to uninitiated lawmakers and the public.</p>
<p>Those who suggest that the program is “not in a crisis” consistently point out that even after the Old Age and Survivors Trust Fund runs out of reserves, it could continue to pay 75 percent of current-law benefits. But that fate is almost upon the Disability Insurance trust fund which is projected to be exhausted by 2016. Disability benefits advocates, however, are panicked at the prospect of an imminent 20 percent cut in DI benefits.</p>
<p>The groups that are strenuously resisting Social Security reforms constitute essential and integral elements of the socio-economic “vortex” into which the program is sinking. They apparently do not appreciate that whether the system is in a “crisis” ought to be judged on the basis of the program’s financial trajectory and not on the basis of imminent insolvency.</p>
<p>Their policy prescription to ignore the program’s prospective financial shortfall — highly likely under current laws — will produce a result that is precisely the opposite of their preference: A forced cut in Social Security benefits. More sensible would be to craft a substantive reform — and sufficiently early — to help place the program on sustainable financial footing. Program reforms should also improve citizens’ retirement security — a function that has clearly eroded over the years.</p>
<p>So here’s how the Report’s opening statement should be crafted: “Social Security, a foundational program of economic security for the American public — upon which millions of today’s and future generations depend for economic support during retirement — is inexorably headed toward financial insolvency. While insolvency is not projected for two more decades, continuing failure to reform the program is increasing the cost of economic adjustments that must be made in the future — cost increases that are at odds with the program’s fundamental objective of enhancing retirement security for today’s and future generations.”</p>
http://www.cato.org/publications/commentary/social-security-falls-even-deeper-sinkholeThu, 06 Jun 2013 10:25 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleJagadeesh Gokale debates social security disability on American Law Journal TVhttp://www.cato.org/multimedia/media-highlights-tv/jagadeesh-gokale-debates-social-security-disability-american-law
http://www.cato.org/multimedia/media-highlights-tv/jagadeesh-gokale-debates-social-security-disability-american-lawTue, 23 Apr 2013 12:11 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleJagadeesh Gokhale discusses social security and chained CPI on WRVA's The Jimmy Barrett Showhttp://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-social-security-chained-cpi-wrvas
http://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-social-security-chained-cpi-wrvasMon, 15 Apr 2013 12:00 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleJagadeesh Gokhale discusses social security on Sirius XM Radio's POTUShttp://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-social-security-sirius-xm-radios-potus
http://www.cato.org/multimedia/media-highlights-radio/jagadeesh-gokhale-discusses-social-security-sirius-xm-radios-potusWed, 10 Apr 2013 12:45 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleReforming Social Security Disability Insurancehttp://www.cato.org/multimedia/daily-podcast/reforming-social-security-disability-insurance
<a href="http://www.cato.org/regulation/spring-2013/reforming-ssdi">Reforming SSDI</a> from the Spring 2013 issue of <em>Regulation</em>.http://www.cato.org/multimedia/daily-podcast/reforming-social-security-disability-insuranceFri, 05 Apr 2013 16:06 EDTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleAARP Misleads Elderly about Social Security's Fiscal Healthhttp://www.cato.org/publications/commentary/aarp-misleads-elderly-about-social-securitys-fiscal-health
<p>The American Association of Retired Persons (AARP) is perhaps the most powerful lobbying organization in the U.S. Its Policy Council promotes national fiscal policies that protect its members’ interests.</p>
<p>But the Council cites half-truths, uses ambiguous language, and omits key details about the programs and policies it discusses — especially on Social Security — in its communications with those members.</p>
<p>A recent letter responding to an enquiry about AARP’s policy perspective on Social Security, for example, appears to claim that the program has no financial worries:</p>
<p>“I am pleased to tell you, Social Security is not ‘broke.’ In 2011, the Social Security Trust Funds ran a surplus of about $69 billion. That surplus was added to Social Security’s accumulated reserves, which totaled about $2.7 trillion at the beginning of 2012. ….In fact, in 2011, the Social Security Trust Funds earned $114 billion in interest at an average rate of 4.4%.”</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">But the AARP cites half-truths, uses ambiguous language, and omits key details about the programs and policies it discusses — especially on Social Security.”</span></p>
</blockquote>
<p>This is a typical AARP half-truth.</p>
<p>Since when do we figure whether a program is broke by looking at just its current surplus or assets on hand? (we’ll avoid an argument by granting, for now, that the Social Security Trust Fund holds “assets.”)</p>
<p>What about the program’s obligations?</p>
<p>The Social Security Trustees’ 2011 and 2012 Annual Reports (Tables IV B. 6 in both reports), reveal the following: Unfunded obligations for all participants from 1935 to an “infinite horizon” — that is, forever — have risen from $17.9 trillion in 2010 to $20.5 trillion in 2011. But through just 2085, they’ve jumped from $6.5 trillion to $8.6 trillion.</p>
<p>In short, during 2011 Social Security’s total unfunded obligations increased by $2.6 trillion when calculated in perpetuity. If we count just the next 75 years, the increase in the program’s unfunded obligations during 2011 was $2.1 trillion.</p>
<p>The 2011 accrual of unfunded Social Security obligations dwarfs the surplus income of $69 billion accumulated during 2011 — which the AARP letter focuses on exclusively. Note also that Social Security’s total present-valued obligations — $20.5 trillion as of year-end 2011 — also dwarf its Trust Fund of $2.7 trillion.</p>
<p>These numbers reveal a funding ratio of just 13%, whereas in the private sector and for state government pension plans required funding ratios are 80% or larger.</p>
<p>Such a low funding ratio implies that the program will depend almost entirely on future revenues to pay benefits to today’s retirees and those about to enter retirement, unless those benefits are scaled back.</p>
<p>But, as shown below, AARP rejects all benefit side changes to Social Security.</p>
<p>The financial progression of annual Trust Fund income surpluses being outpaced by Social Security’s annual accruals of unfunded obligations has been a constant feature — observed ever since Social Security’s Trustees began publishing these estimates in 2003.</p>
<p>One way to view the result is to delve into the Trustees’ 2003 report which shows the Trust Fund containing assets of $1.4 trillion while Social Security’s obligations amounted to $10.5 trillion.</p>
<p>Since that year, the program’s obligations have increased by $10 trillion while the Trust Fund has accumulated just $1.4 trillion.</p>
<p>According to AARP, however, the program is not broke.</p>
<p>That the program’s unfunded obligations would increase more rapidly than its Trust Fund is a well-known financial (and predictable) phenomenon. The AARP letter reports that the $2.7 trillion trust fund is currently accruing interest at 4.4% per year (in nominal terms).</p>
<p>In the future, this accrual will be faster under the Trustees’ assumed long-range interest rate of 5.7%. But that means the program’s total obligations of $20.5 trillion will also grow at 5.7% per year.</p>
<p>Contrast this with what the Trust Fund is drawing upon — not real income-generating assets but the U.S. Treasury dipping into federal general revenues which, in turn, will require increasing nonpayroll taxes.</p>
<p>However, under the Trustees’ long-range assumptions, the income tax base will grow at a much slower rate — at just 4.3% per year under the Trustees’ long range assumptions of annual inflation at 2.8%, annual productivity growth of 1.1%, and annual population growth rate of 0.4%.</p>
<p>The AARP letter acknowledges that future financial shortfalls are likely to arise for Social Security.</p>
<p>It says that “changing demographics … do call for some adjustments to ensure that future generations also enjoy the same essential protections (emphasis added). …If these changes are made sooner rather than later, modest adjustments will overcome the projected shortfall.”</p>
<p>But that’s followed by: “the goal of reform must be strengthening and improving Social Security’s guaranteed benefits.”</p>
<p>This is a classic AARP misdirection: Given that (a) Social Security does not produce anything but only transfers funds from taxpayers to beneficiaries, (b) that there’s a financial shortfall, and (c) that Social Security benefits must be “strengthened and improved,” for AARP’s current clients, it follows that most if not all of the adjustments must come from the program’s revenue side or from outside of Social Security current financing framework.</p>
<p>AARP misses is the fact that imposing higher taxes on future taxpayers would not extend to them the same essential protections during their lifetimes.</p>
<p>Such AARP communications — with half-truths and misdirection, either willful or unwitting — serve only to mislead AARP’s members — who, one expects, care not only about themselves, but also about their children and grandchildren. The latter will be ill-served by AARP’s muddled promotion of the status quo on Social Security benefits.</p>
http://www.cato.org/publications/commentary/aarp-misleads-elderly-about-social-securitys-fiscal-healthTue, 26 Feb 2013 11:38 ESTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleSpending Beyond Our Meanshttp://www.cato.org/multimedia/daily-podcast/spending-beyond-our-means
http://www.cato.org/multimedia/daily-podcast/spending-beyond-our-meansFri, 15 Feb 2013 22:50 ESTJagadeesh Gokhale (Author at Cato Institute)Jagadeesh GokhaleState of the Union 2013http://www.cato.org/multimedia/cato-video/state-union-2013
<p>Cato Institute scholars Michael Tanner, Alex Nowrasteh, Julian Sanchez, Simon Lester, John Samples, Pat Michaels, Jagadeesh Gokhale, Michael F. Cannon, Jim Harper, Malou Innocent, Juan Carlos Hidalgo, Ilya Shapiro, Trevor Burrus and Neal McCluskey respond to President Obama’s 2013 State of the Union Address.<br><br>Video produced by <a href="http://www.cato.org/people/caleb-brown">Caleb O. Brown</a>, Austin Bragg and Lester Romero.</p>http://www.cato.org/multimedia/cato-video/state-union-2013Fri, 15 Feb 2013 11:15 ESTJagadeesh Gokhale (Author at Cato Institute)Michael D. Tanner, Alex Nowrasteh, Julian Sanchez, Simon Lester, John Samples, Patrick J. Michaels, Jagadeesh Gokhale, Michael F. Cannon, Jim Harper, Malou Innocent, Juan Carlos Hidalgo, Ilya Shapiro, Trevor Burrus, Neal McCluskey